Oil price unstable
Traders speculate on a possible global recession as stock markets gyrate
Analysts attribute the recent gyrations in the price of oil to concerns that a global economic recession may be on its way. After a brief respite following an OPEC announcement of production cuts earlier in December, oil prices continued on a downward trajectory, with Brent crude slipping to around $50 per barrel on Dec. 23. Stock markets also tanked. On Dec. 26, however, perhaps cheered by Christmas festivities, traders took a more optimistic position, apparently viewing the pre-holiday crash as over pessimistic: Brent crude recovered to more than $54. Stock markets also recovered somewhat.
The Organization of the Petroleum Exporting Countries had created some jitters in November, when its monthly report suggested that the global economic growth rate may slow next year, causing a slight downturn in the global demand for oil. The oil price, which had been tumbling from the mid-$80s since early October, continued to fall. Then, on Dec. 7, OPEC announced an agreement between its member countries and some other oil producing nations to cut production by 1.2 million barrels per day. That initially stabilized the price at around $60. But in mid-December the price started falling again, a trend that continued through the coming week.
IEA monthly reportThe International Energy Agency published its monthly oil market report on Dec. 13, while the price was still holding, following OPEC’s production cut announcement. The IEA report suggested that OPEC may have established a $60 price floor. However, subsequent events have raised question marks about that theory.
IEA anticipates global economic growth slowing in 2019 but thinks that lower oil prices will result in global oil demand continuing to grow at around 1.4 million barrels per day, as previously predicted by the agency.
On the supply side of the oil market, on a year-on-year basis OPEC oil production rose a little in November, as record production from Saudi Arabia and the United Arab Emirates more than offset a sharp drop in production in Iran. However, the total global supply fell by 360,000 barrels per day to 101.1 million barrels per day, as a consequence of lower production from the North Sea, Canada and Russia.
Global stock levels rose in October for the fourth consecutive month - there is generally an inverse correlation between stock levels and the oil price, since an excess of stocks tends to point to an excess of supply.
Moving into 2019, OPEC has now made its production cut commitment. At the same time IEA predicts that non-OPEC oil supplies in 2019 will grow a bit more slowly than previously thought, in part because of Russia’s agreement with OPEC on production cuts, but also because of lower production growth in Canada.
Saudi Arabia, Russia and USThe IEA commented that Saudi Arabia, Russia and the United States now account for about 40 percent of global oil production and, therefore, dominate the global oil market. Cooperation between Saudi Arabia and Russia over production quotas means that these two countries can cause large swings in oil production capacity. At the same time both countries have a strong motivation to prevent oil prices from falling, given the dependence of their economies on oil revenues.
On the other hand, in the United States, now the world’s largest oil producer, production decisions are made by companies, not the state. And, with also having the world’s largest oil consumption base, the United States has an incentive to keep oil prices relatively low, albeit at levels that encourage new oil investment, the IEA report comments.
On Nov. 30 the United States transitioned from being a net importer of oil to becoming a net exporter. With this transition taking place, OPEC has to consider the increasing U.S. influence in the oil market. As U.S. production grows and imports decline, rising U.S. exports will increasingly compete with some OPEC countries in the global market place, the IEA report says.